Income tax cut, sales tax expansion debated

Tuesday

Feb 12, 2013 at 12:01 AMFeb 12, 2013 at 7:22 PM

Ohio Tax Commissioner Joe Testa told lawmakers today that the expansive tax overhaul package proposed by Gov. John Kasich will make a fundamental shift from a reliance on income taxes to a consumption tax. Kasich is proposing a 20-percent income tax cut phased in over three years. In addition, business owners would get a 50-percent income tax deduction on the first $750,000 of income. He also is proposing a sweeping expansion of the type of services impacted by the state sales, and lowering the state sales tax rate from 5.5 percent to 5 percent.

Jim Siegel, The Columbus Dispatch

Ohio Tax Commissioner Joe Testa told lawmakers today that the expansive tax overhaul package proposed by Gov. John Kasich will make a fundamental shift from a reliance on income taxes to a consumption tax.

“High income tax rates are toxic to job creation,” he said during testimony before the House Finance Committee. “The best environment for job creation is one in which there is no income tax.”

Kasich is proposing a 20-percent income tax cut phased in over three years. In addition, business owners would get a 50-percent income tax deduction on the first $750,000 of income. He also is proposing a sweeping expansion of the type of services impacted by the state sales, and lowering the state sales tax rate from 5.5 percent to 5 percent.

The overall cut, he said, when also including a new tax on shale drilling, would be $1.4 billion over three years.

“This small business owner tax break is designed to provide them with an incentive to continue to invest in Ohio and grow their business,” Testa said. “They will buy new equipment, increase marketing efforts or add staff. The tax cut demonstrates that Ohio is serious about creating a business-friendly atmosphere that fosters job creation.”

But Democrats question whether income tax cuts will really lead to more jobs, arguing the plan will force the poor and middle class to pay more while giving tax breaks to millionaires.

In a press conference yesterday, Democrats said they want to see proof where this type of tax cut has created jobs in other states. They argue that the 21-percent state income tax cut phased in starting in 2005 did nothing to stop Ohio from losing hundreds of thousands of jobs. Republicans, meanwhile, note that now that the Great Recession is over and the tax cuts have fully phased-in, the state economy is outpacing national job growth.

“Where in this budget is the language that says, in order to get the tax cut, you need to make investments in things like hiring employees, workforce development, purchasing items for your plant – making investments that are going to deepen your roots in Ohio to assure that this tax cut creates economic development in Ohio?” Rep. John Patrick Carney, D-Columbus, said on Monday.

Testa said broadening the sales tax base to dozens of additional services more accurately reflects the shift in the economy, from consuming goods to consuming services. When the sales tax law was enacted in 1935, he said, people spent most of their money on goods. Now, services account for two-thirds of all economic activity.

Democrats have not specifically opposed expanding the sales tax base, but they argue that, when included as part of this overall tax plan, lower-income and middle-class earners will pay more because they do not see as much benefit from an income tax cut.

The Policy Matters study says the total impact of the tax changes will leave those making an average of $25,000 paying an extra $77 per year, and those making an average of $51,000 paying $8 more. Meanwhile, those making an average of $203,000 would see a net $1,524 tax cut, and those making $900,000 would see a tax cut of nearly $10,400.

“This is nothing short of class warfare, Kasich-style,” Rep. Mike Foley, D-Cleveland, said yesterday. “In reality, this is Robin Hood in reverse.”

The proposal also will impact county and transit authority sales tax rates. To ensure those taxes do not generate an additional 30-percent revenue increase as the tax base expands, Kasich is proposing to reduce those rates and guarantee a 10-percent growth rate. Locals would not be allowed to change their sales tax rates for three years.

The change means counties and transit authorities would get a $120 million increase over two years, instead of the $700 million if rates were left alone.

Rep. Jeff McClain, R-Upper Sandusky, this morning expressed concern about not allowing counties to increase their rates for three years.

Testa said the governor’s ultimate goal of the plan is to help small businesses grow and make Ohio a more attractive place to do business.

“The personal income tax cuts in conjunction with the small business income tax deduction and the lower sales tax rates will encourage entrepreneurs to grow their businesses in the state, hopefully fueling enough economic growth to permit additional income tax rate reductions in the future,” he said.

The full 4,200-page budget was released this afternoon and can be found here.

jsiegel@dispatch.com

@phrontpage

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